Reviving the Misery Index

Graybeards will remember Jimmy Carter’s embrace of the “Misery Index”—the combination of the inflation rate and the unemployment rate—that Peanut Brain used against Gerald Ford in 1976, but which he then doubled during his forlorn presidency as Ronald Reagan skillfully reminded everyone in 1980. Well, it’s baaaack.

Only this time in a much more refined and useable way, as economist Steve Hanke of Johns Hopkins University explains in a terrific column in the Indonesia-based Globe Asia magazine. (The Cato Institute, where Hanke is a fellow, has cross-posted a full version of the article.) Here’s a few excerpts, though the real action can be seen in some of the charts and tables Hanke and Globe Asia have put together:

The late Arthur Okun, a distinguished economist who served as chairman of the President’s Council of Economic Advisers during President Johnson’s administration, developed the original misery index for the United States. Okun’s index is equal to the sum of the inflation and unemployment rates.

Harvard Professor Robert Barro amended the misery index by also including the 30-year government bond yield and the output gap for real GDP. Barro used his index to measure the change in misery during a president’s term. . .

The data in the misery index chart speak loudly. Contrary to left-wing dogma, the Reagan “free-market years” were very good ones. And the Clinton years of Victorian fiscal virtues – when President Clinton proclaimed in his January 1996 State of the Union address: “the era of big government is over” – were also very good ones.

The misery index pours cold water on the current critique of free markets and fiscal austerity – a critique that has taken on the characteristics of a religion embraced without investigation. Indeed, it makes one wonder whether the critics ever bothered to subject their ideas to a reality check.

You can see the results for each presidential term for the last 60 years:

Hanke then turns his attention internationally, which special (and much deserved) malice for Venezuela.

When measured by the misery index, Venezuela holds the ignominious top spot, with an index value of 79.4. But, that index value, as of 31 December 2013, understates the level of misery because it uses the official annual inflation rate of 56.2%. In fact, I estimate that Venezuela’s annual implied inflation rate at the end of last year was 278%. That rate is almost five times higher than the official inflation rate. If the annual implied inflation rate of 278% is used to calculate Venezuela’s misery index, the index jumps from 79.4 to 301, indicating that Venezuela is in much worse shape than suggested by the official data.